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-{{anat|security}}You’ll be most likely wanting to see the discussion on this wonderfully baffling subject under Section {{isdaprov|2(a)(iii)}} of the {{isdama}}. But see also the [[extended liens]] case, which discusses “rare cases in which security rights fall wholly outside the recognised categories of [[lien]], [[pledge]], [[mortgage]] or [[charge]], and into a residual, purely [[contractual interest|contractual]], category sometimes categorised as turning the grantor’s property into a form of ‘[[flawed asset]]’.”
+{{anat|security|}}{{flawed asset capsule|isdaprov}}
-More generally, following an [[event of default]], a [[flawed asset]] provision allows an innocent, but [[out-of-the-money]] party to a {{tag|derivative}} or {{tag|securities finance}} transaction to suspend performance of its obligations without terminating the transaction and thereby crystallising a [[mark-to-market]] loss.
+=====The ISDA’s Section 2(a)(iii)=====
+{{drop|Y|ou’ll be most}} likely wanting to see the discussion on this wonderfully baffling subject under Section {{isdaprov|2(a)(iii)}} of the {{isdama}}.
-The asset – a right to payment under the transaction – is “flawed” in the sense that it only become payable ''if the conditions precedent to payment are fulfilled''.
+When first introduced, in 1987, they hadn’t even invented the {{csa}}. Even once they had, it would be common for a muscular [[swap dealer]] to insist on one-way margining: “You, no-name pipsqueak highly [[Leverage|levered]] [[hedge fund]] type, are paying ''me'' [[variation margin]] and [[initial margin]]; I, highly-capitalised, {{strike|Balance-sheet levered|prudentially regulated}} financial institution, am not paying you ''any'' [[margin]].”
+====Query the utility these days====
+{{drop|W|ell, those days}} are gone, and bilateral zero-threshold margin arrangements are more or less obligatory nowadays, so it’s hard to see the justification for a [[flawed asset]] provision. But we still have one, and modish post-crisis threats by regulators worldwide to stamp them out seem, sometime in 2014, to have come to a juddering halt.
-Section {{isdaprov|2(a)(iii)}} entered the argot in a simpler, more peaceable time, when zero threshold, daily margined {{tag|CSA}}s were an uncommon, rather fantastical sight. They’re more or less obligatory now – indeed, once regulatory [[uncleared margin]] is a thing they ''will'' be obligatory – so it’s hard to see the justification for a [[flawed asset]] provision.
+One can level many criticisms at the flawed assets concept these days, and the [[JC]] does. Not only is it often triggered by vague, indeterminate things, there are many cases where its technical application makes absolutely no sense. Really, if a margined counterparty doesn’t like the position it is in when a counterparty defaults, its remedy is simple: ''close out''. Just saying “talk to the hand” really ought not to do in these enlightened, margined times.
-===Master trading agreements===
+But see also the [[extended liens]] case, which discusses “rare cases in which security rights fall wholly outside the recognised categories of [[lien]], [[pledge]], [[mortgage]] or [[charge]], and into a residual, purely [[contractual interest|contractual]], category sometimes categorised as turning the grantor’s property into a form of ‘[[flawed asset]]’.”
-*'''{{isdama}}''': You can find it all, in gruesome detail, in the article on Section {{isdaprov|2(a)(iii)}}. The ISDA provision has generated some case law, including [[Metavante]] and [[Firth Rixson]], which the truly insatiable amongst you may care to read.
-*'''{{gmsla}}''': As far as I can see there is no {{isdaprov|2(a)(iii)}} equivalent in the GMSLA. Nor would you expect one. It makes little ense in a master agreement for transactions that generally have zero or short tenors, and are inherently margined daily as a matter of course – i.e., there is no “uncollateralised, large, [[out-of-the-money]] exposures” an innocent stock lender would want to protect such a flawed asset provision.
+===Flawed assets clauses in master trading agreements===
-*'''{{gmsla}}''': Now here’s the funny thing. Even though the {{tag|GMRA}} is comparable to the {{tag|GMSLA}} in most meaningful ways, it '''does''' have a flawed asset provision. I don’t understand it, but that is true about much of the world of international finance.
+====ISDA====
+You can find it all, in gruesome detail, in the article on Section {{isdaprov|2(a)(iii)}}. The ISDA provision has generated some case law, including [[Metavante]] and [[Firth Rixson]], which the truly insatiable amongst you may care to read.
+====GMSLA====
+As far as I can see there is no direct {{isdaprov|2(a)(iii)}} equivalent in the GMSLA, but Section {{gmslaprov|8.6}}, which allows you to suspend payment if you suspect your counterparty’s creditworthiness, is the closest, but it isn't a flawed asset clause. Nor would you expect one. It makes little sense in a master agreement for transactions that generally have zero or short tenors, and are inherently margined daily as a matter of course – i.e., there is no “uncollateralised, large, [[out-of-the-money]] exposures” an innocent stock lender would want to protect such a flawed asset provision.
+====GMRA====
+Now here’s the funny thing. Even though the {{tag|GMRA}} is comparable to the {{tag|GMSLA}} in most meaningful ways, it '''does''' have a flawed asset provision. I don’t understand it, but that is true about much of the world of international finance.
+====Prime brokerage agreements====
+Even though they are financing arrangements, [[prime brokerage]] agreements are often based on ISDA technology. They may have flawed asset clause — let’s fact it, it is the sort of thing credit will insist on it — but it doesn’t need one, as prime brokers are fully margined, so there is no circumstance in which a prime broker would owe a client anything (other than account equity) on termination.
 {{2(a)(iii)}}
+{{ref}}
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